Your success is our success

Uncertainty priced in, Upgrade to BUY

n

May 11, 2012

Rating Buy CMP Rs1,504

Previous Reco Accumulate Target Price Rs1,920

(4.1)/4,966 16,420 n n n

Valuations pricing in bear case scenario (0%/4% volume growth in FY13/14). Product mix to improve going ahead. Strong cash flow/dividend yield to lend further support Value of KTM under-recognized. Benefits emerge from technology sharing and exports. Strong financial performance of KTM to result in value discovery Series of new launches and hike in petrol price (blessing in disguise) can lead to demand revival in 2HFY13. Launches under main brand have higher chance of success Lower FY13E EPS by 4% to Rs 119. Introduce FY14 est. with volume of 5.2mn and EPS of Rs 133. Upgrade to BUY and maintain TP at Rs 1,920 (14.4x/9.4x FY14E PER/EV-EBIDTA)

EPS Chg FY13E/FY14E (%) Target Price change (%) Nifty Sensex

Price Performance
(%) Absolute Rel. to Nifty
Source: Bloomberg

1M -9 -4

3M -13 -6

6M 12M -12 -7 15 29

Valuations factoring in drop in FY13 volumes/ no growth in FY14

Valuations pricing in bear case scenario - 0%/4% volume growth in FY13/FY14. We assign a low probability of aggressive pricing adopted by industry. Currently, we lower our FY13 EPS by 4% to Rs 119 (due to lower exports) and introduce FY14 with an EPS of Rs 133 (FY13E/14E PER of 12.6x/11.3x).

Relative price chart

1825 Rs % 50 1710 38 1595 26

1480

14

Product mix deterioration has happened, expect improvement

FY12 witnessed a sharp deterioration in product mix with a rising share of entry level motorcycle. We do not see a further significant deterioration to the product mix in the domestic market. For exports we are factoring in 25% volume drop in exports to SriLanka due to increase in import duty.

1365

1250 May-11

Jul-11

Sep-11
Bajaj Auto (LHS)

Nov-11

Jan-12

Mar-12

-10 May-12

Rel to Nifty (RHS)

Source: Bloomberg

Stock Details
Sector
Bloomberg Equity Capital (Rs mn) Face Value(Rs) No of shares o/s (mn) 52 Week H/L Market Cap (Rs bn/USD mn) Daily Avg Volume (No of sh) Daily Avg Turnover (US$mn)

KTM value under - recognized

Automobiles BJAUT IB 2,894 10 289 1,843/ 1,260 435/ 8,127 414,735 13.0

We believe that the value of KTM is not fully recognized. The benefits emerge from improving technological capability in India and expanding international business. We understand that KTM intends to grow at 25% CAGR over next four years and plans to source ~50% of its requirement from India (~11,000 units in FY12). KTMs success with Duke125cc/Duke 200cc will provide further impetus to the association. BJAUT has increased its stake in KTM to 47% (from 40%). KTM has also improved its financial position over last few years with sharp reduction in debt, strong cash flows and improving margins (better than BMW in CY11).

Series of launches to lead to industry demand revival

1HFY13 to witness a series of new launches (Dream Yuga, New Discover, Pulsar 200NS, Passion Xpro, TVS Victor, etc.) Historically, a series of successful new launches aids demand revival. Also, this reduces the risk of aggressive pricing. The launches under mother brand have better rate of achieving success. BJAUT and HMCL are introducing products under main brand.

Shareholding Pattern (%)

Mar12 Dec11 Sep11 Promoters FII/NRI Institutions Private Corp Public
Source: Bloomberg

50.0 16.5 8.4 8.5 16.6

50.0 16.1 8.5 8.6 16.7

50.0 16.0 8.3 8.8 16.9

Expected fuel price hike a blessing in disguise for two wheelers

Given the recent increase in excise/VAT and slowing economy, further increase in fuel price can be a blessing in disguise for two wheeler demand, especially motorcycle. We have already seen downtrading in the motorcycle segment in FY12. However, it has failed to create an impact on margins of BJAUT/HMCL Financial Snapshot (Standalone) (Rsmn)
EPS APAT EPS RoE (%) 71.2 56.2 48.0 43.3 P/E 15.6 13.7 12.6 11.3 EV/ EBITDA 12.0 9.6 8.2 7.1 P/BV 8.9 6.8 5.4 4.4

Chirag Shah chirag.shah@emkayglobal.com +91-22-66121252 Siddhartha Bera siddhartha.bera@emkayglobal.com +91-22-662424924

YEMar FY11A FY12A FY13E FY14E

Net Sales 165,148 197,206 217,060 241,117

EBITDA (Core) 33,028 39,117 43,567 48,199 (%)

(Rs) % chg 96.4 109.5 119.1 133.5 53.4 13.6 8.7 12.1

20.0 27,893 19.8 31,688 20.1 34,450 20.0 38,634

Emkay Global Financial Services Ltd.

Company Update

Emkay

Bajaj Auto

Bajaj Auto

Company Update

Valuations factoring in drop in FY13 volumes/ no growth in FY14

We believe the recent sharp correction in the stock price is ignoring the diversified business franchise of BJAUT. Our worst case scenario analysis (5% YoY domestic volume drop in FY13) indicates 7% drop in FY13 EPS at Rs 111 (vs. our estimates of Rs 119, flat YoY) and Rs 116 EPS in FY14 (vs our estimate of Rs 133.5).
Exhibit 1: Scenario Analysis Units FY12 Motorcycles 3 Wheelers Total Domestic Exports Motorcycles 3 Wheelers -Sri Lanka -Others Total volumes EPS PE (X) Price DPS Value per share 2,566,770 202,979 2,769,749 1,579,824 1,267,648 312,176 100,000 212,176 4,349,573

FY13CE 2,812,195 212,073 3,024,268 1,832,705 1,458,127 374,577 115,000 259,577 4,856,973 119 12 1,429 50 1,479

% YoY 10 4 9 16 15 20 15 22 12

FY13RE 2,438,432 192,830 2,631,262 1,709,145 1,400,751 308,394 75,000 233,394 4,340,406 111 12 1,327 50 1,377

% YoY (5) (5) (5) 8 11 (1) (25) 10 (0)

FY14E 2,438,432 192,830 2,631,262 1,872,559 1,540,826 331,733 75,000 256,733 4,503,821 116 12 1,392 100 1,492

% YoY 10 10 8 10 4

Source: Company, Emkay Research; CE Current Estimates; RE Revised Estimates

Exhibit 2: Diversified volume mix (FY12)

Exhibit 3: Diversified EBITDA mix (FY12E)

Exp (3 Whlr) 7% Exp (2 Whlr) 29%

Platina 12%

Discover / Boxer 31%

Spares & Others 11% Exp. Incentive 16%

Platina 2%

Discover / Boxer 17%

Exp (3 Whlr) 10% Three w heelers 5%

Source: Emkay Research

Pulsar 22% Three w heelers 12%

Pulsar 16%

Exp (2 Whlr) 10%

Source: Emkay Research

KTM: Value under - recognized

BJAUT currently holds ~47% of KTM (increased by 6.3% in April 2012). We believe value of KTM is not recognized fully. We expect BJAUT to benefit by improving its technological capability and expanding its international business. We highlight some of the potential benefits from the partnership with KTM

KTM aims to achieve global volumes of 200,000 units by 2015 (25% CAGR during 2011-15E). It targets to increase its sourcing from BJAUT from ~11,000 units currently to ~50% by 2015. The value of export of each KTM unit equals 4.5x motorcycle and 2x 3 wheelers KTM launched Duke 125cc/Duke 200cc in Europe. It has received strong response to these two products. Both these were manufactured in BJAUTs facility at Chakan with ~95% localization. KTM plans to introduce 7 new models in India in coming 2 years which includes one 375cc model, 990cc Super Duke etc. It has been closely involved with BJAUT in developing these platforms and a new 2 cylinder engine platform. This is over and above the 125cc/200cc engine platforms for KTM and BJAUT. We believe these initiatives should help BJAUT to improve its technological capabilities (especially life cycle performance) as well as expand its product portfolio. 2

Emkay Research

May 11, 2012

Bajaj Auto
Exhibit 4: BJAUT Export volume mix (FY14E) Exhibit 5: BJAUT Export revenue mix (FY14E)
KTM 8%

Company Update

3 Wheeler 21%

KTM 2%

3 Wheeler 35%

Motorcycle 77%
Source: Emkay Research Source: Emkay Research

Motorcycle 57%

Improving KTM financials: Post KTMs restructuring in 2008/09, it has achieved considerable improvement in its balance sheet. Net debt and gearing ratios have improved significantly over the past few years and cash flow generation has been robust.
Exhibit 7: Improving cash flows

Exhibit 6: Net debt and gearing ratios

Euro Mn 300 250 200 150 100 50 0 Aug-08 Aug-09 Net debt
Source: KTM, Emkay Research

2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 Aug-10 Dec-10 Dec-11 Net debt/Equity (RHS)

Euro Mn 80 60 40 20 0 -20 -40 -60 OCF FCF OCF (% sales) Aug-08 Aug-09 Aug-10 Dec-10 Dec-11

15 10 5 0 -5 -10 FCF(% sales)

Source: KTM, Emkay Research

KTM - margins have crossed that of BMW: In CY2011, KTM achieved PBT margin of 3.6% which was significantly higher than that of BMWs motorcycles division at 2.9%. This was despite KTMs volumes at ~70% of BMWs motorcycles volumes.
Exhibit 9: Volume comparison

Exhibit 8: PBT Margin profile

6 4 2 0 2008 2009 2010 2011 -2 -4 BMW

Source: Company, Emkay Research

120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 2007 2008 2009 2010 2011

KTM
Source: Company, Emkay Research

BMW

KTM

Emkay Research

May 11, 2012

Bajaj Auto

Company Update

Domestic demand Adequate triggers for two wheeler demand outperforming other segments
Series of new launches can revive the demand in 2HFY13
Plethora of new launches in FY13 can lead to a scenario of early revival in demand. Some of the expected new launches are Dream Yuga by Honda Motor and Scooters India, New Discover/Pulsar by BJAUT, Passion X Pro (110cc)/Ignitor (125 cc) by HMCL, Hayate by Suzuki and a new Victor by TVS Motor. It should be noted that except for 1HFY11, we have not seen such a sharp increase in new launch activity. A series of successful launches will result in demand revival. The launches under mother brand have better rate of achieving success. BJAUT and HMCL are introducing products under main brand.
Exhibit 10: Product launch details Quarter Q1FY07 Q2FY07 Q3FY07 Q4FY07 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1/Q2FY13E New Discover; Pulsar 200 NS Passion X Pro CBR 150R (110cc); Ignitor 125cc Dream Yuga TVS Victor Suzuki Hayate Impulse Discover 125cc Stunner YZF-R15; TVS Max 4R Discover 150cc Unicorn Dazzler Super Splendour Twister 125cc; Splendour Pro Pulsar 150cc Discover 100cc Pulsar 135cc TVS Jive YBR 110 Suzuki Slingshot; YBR 125, Yamaha SZ Karizma ZMR Hunk 200 cc Pulsar 200cc Discover 135cc Splendor NXG CBZ - Xtreme 150cc BJAUT Platina 100cc Hero Motocorp Honda Shine Others

Source: Emkay Research

Rising fuel prices: can be a blessing in disguise for motorcycles

Slowing income of consumers and expected increase in petrol price can act as a blessing in disguise for motorcycle demand. FY12 has already witnessed the impact of slowing income as reflected from downtrading. More importantly, this has not impacted the margins profile of BJAUT and HMCL.

Emkay Research

May 11, 2012

Bajaj Auto

Company Update

Exhibit 11: BJAUT product mix and margin profile

21 20 19 18 17 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 17 15 13 11 9 7

Exhibit 12: HMCL product mix and margin profile

17 16 15 14 13 12 11 10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 15 14 13 12

EBITDA Margin (% LHS)

Economy (%)

3 Wheelers (%)

EBITDA Margin (% LHS)

Source: Company, CRISIL, Emkay Research

Economy (%)

Source: Company, CRISIL, Emkay Research

BJAUT - Base effect to kick in from 2QFY13

BJAUTs volume growth has been lower than that of industry at low single digits from Q2FY12 onwards. We believe low base effect and new launches can positively aid volume growth from H2FY13.
Exhibit 13: BJAUT Volume growth lagging peers Exhibit 14: Motorcycle market share

80 60 40 20 0 Feb-11 Dec-10 Aug-10 -20 Aug-11 Dec-11 Feb-12 Jun-10 Jun-11 Oct-10 Apr-10 Apr-11 Oct-11

30 25 20 15 10 5 Jul-09 Jul-10 Jan-10 Jan-11 Jul-11 Apr-09 Apr-10 Apr-11 Jan-12 Q3FY12 Oct-09 Oct-10 Oct-11

HMCL 80 75 70 65 60 55 50 45 40

BJAUT
Source: Company, Emkay Research

HMCL

HMSI

BJAUT
Source: Company, Emkay Research

HMSI

HMCL (RHS)

BJAUT - Product mix to improve

Companys product mix has deteriorated significantly over the past few quarters (share of economy segment increasing by 700 bps). Notably, companys EBITDA margins have remained quite stable during the same period. We believe product mix is at its trough and should improve going ahead driven by new launches in the executive and premium segments.
Exhibit 15: Product mix unfavorable Exhibit 16: EBITDA Margins range bound

100 80 60 40 20 0

6 25 6 21 34 9 Q2FY11

6 25 5 22 32 9 Q3FY11

6 23 6 20 35 10 Q4FY11

8 31 4 14 32 10 Q1FY12

7 29 5 16 32 11 Q2FY12

7 28 5 18 29 13 Q3FY12

7 28 5 18 27 16 Q4FY12

7 29 5 16 30 12 FY12E

7 31 5 16 29 13 FY13E

22 21 20 19 18 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q4FY12

Economy Dom. 3 Whlr

Source: Company, Emkay Research

Executive Exp. 2 Whlr

Premium Exp. 3 Whlr

Source: Company, Emkay Research

Emkay Research

May 11, 2012

Bajaj Auto

Company Update

Currency to cushion earnings in near term

We have factored in USD/INR at 50.5/50 for FY13/14E. Company has hedged 70% of its FY13 exposure at a base rate of 47 with range forwards at 47-51. Given the depreciating rupee, we believe company would be able to benefit from favorable forex. Our sensitivity analysis indicates 3% depreciation in USD/INR would increase FY13 EPS by 5%. There also exists scope for further upgrades as new range forward hedges would be negotiated at favorable rates (upper band above 51).

Valuations and View

We introduce FY14E estimates with volume growth of 10%/16% YoY for domestic and export markets. We factor in USD/INR at 50 and arrive at EPS of Rs 133.5 for FY14. At Rs1,503 the stock trades at PER of 12.6x/11.3x and EV/EBIDTA of 8.0x/6.9x our FY13/14 estimates respectively. Given the diversified business model, low sensitivity of earnings to change in volumes, high cash flow generation of the business and strong dividend yield we find stock attractive. Post the sharp correction in stock price, we upgrade our rating to BUY. We maintain our TP at Rs 1,920 which implies 14.4x PER and 9.4x EV/EBITDA on FY14 estimates.
Exhibit 17: Revision in Estimates FY13E Rs mn Volumes Sales EBIDTA EBIDTA margins (%) Net Profits EPS
Source: Emkay Research

FY14E % Change (3.2) (3.8) (4.5) (4.1) (4.1) Revised 5,196,601 241,117 48,199 20.0 38,634 133.5 12.1 12.1 % YoY 10.5 11.1 10.6

Earlier 4,856,973 225,649 45,622 20.2 35,907 124.1

Revised 4,701,207 217,060 43,567 20.1 34,450 119.1

Emkay Research

May 11, 2012

Bajaj Auto

Company Update

Key Financials (Standalone) Income statement

Y/E Mar (Rsmn) Net Sales Growth (%) Expenditure Materials Consumed Employee Cost Other Exp EBITDA Growth (%) EBITDA margin (%) Depreciation EBIT EBIT margin (%) Other Income Interest expenses PBT Tax Effective tax rate (%) Adjusted PAT Growth (%) Net Margin (%) (Profit)/loss from JVs/Ass/MI Adjusted PAT After JVs/Ass/MI E/O items Reported PAT PAT after MI Growth (%) FY11A 159,981 39 132,120 117,988 4,648 9,484 33,028 30 20.0 1,228 31,800 19 4,599 17 36,382 8,489 23 27,893 53 17 0 27,893 8,596 36,489 27,893 53 FY12A 190,143 19 158,089 141,110 5,253 11,725 39,117 18 19.8 1,292 37,825 19 4,715 5 42,535 10,846 26 31,688 14 16 0 31,688 -2,288 29,401 31,688 14 FY13E 209,525 10 173,493 154,733 6,207 12,553 43,567 11 20.1 1,408 42,159 19 6,365 3 48,521 14,071 29 34,450 9 16 0 34,450 0 34,450 34,450 9 FY14E 232,666 11 192,917 171,602 7,201 14,114 48,199 11 20.0 1,497 46,702 19 7,715 3 54,414 15,780 29 38,634 12 16 0 38,634 0 38,634 38,634 12

Balance Sheet
Y/E Mar (Rsmn) Equity share capital Reserves & surplus Net worth Minority Interest Secured Loans Unsecured Loans Loan Funds Net deferred tax liability Total Liabilities Gross Block Less: Depreciation Net block Capital work in progress Investment Current Assets Inventories Sundry debtors Cash & bank balance Loans & advances Other current assets Current lia & Prov Current liabilities Provisions Net current assets Misc. exp Total Assets FY11A 2,894 46,209 49,102 0 0 3,252 3,252 297 52,651 33,952 19,125 14,827 699 47,952 28,726 5,473 3,628 5,565 11,896 2,164 39,553 24,267 15,286 -10,827 0 52,651 FY12A 2,894 60,676 63,570 0 235 2,252 2,487 297 66,354 35,924 20,416 15,507 699 62,952 35,682 6,538 4,334 8,486 14,160 2,164 48,487 30,318 18,168 -12,804 0 66,354 FY13E 2,894 77,108 80,002 0 235 1,252 1,487 297 81,786 38,094 21,824 16,270 699 77,952 37,782 7,205 4,776 10,263 13,374 2,164 50,916 30,896 20,020 -13,135 0 81,786 FY14E 2,894 95,537 98,430 0 235 252 487 297 99,214 40,505 23,321 17,184 699 92,952 42,323 8,138 5,493 9,203 17,326 2,164 53,944 31,712 22,231 -11,620 0 99,214

Cash Flow
Y/E Mar (Rsmn) PBT (Ex-Other income) Depreciation Interest Provided Other Non-Cash items Chg in working cap Tax paid Operating Cashflow Capital expenditure Free Cash Flow Other income Investments Investing Cashflow Equity Capital Raised Loans Taken / (Repaid) Interest Paid Dividend paid (incl tax) Income from investments Others Financing Cashflow Net chg in cash Opening cash position Closing cash position FY11A 31,783 1,228 17 0 2,918 -10,110 20,257 -1,543 18,714 4,599 -7,737 -10,966 1,447 -10,134 -17 -13,452 0 13,537 -8,620 671 1,014 1,685 FY12A 37,820 1,292 5 0 4,899 -10,382 31,811 -1,972 29,839 4,715 -15,000 -12,257 0 -765 -5 -15,863 0 0 -16,633 2,921 5,565 8,486 FY13E 42,156 1,408 3 0 2,107 -14,071 31,603 -2,171 29,432 6,365 -15,000 -10,806 0 -1,000 -3 -18,017 0 0 -19,020 1,777 8,486 10,263 FY14E 46,699 1,497 3 0 -2,575 -15,780 29,845 -2,411 27,433 7,715 -15,000 -9,696 0 -1,000 -3 -20,206 0 0 -21,209 -1,060 10,263 9,203

Key Ratios
Y/E Mar Profitability (%) EBITDA Margin Net Margin ROCE ROE RoIC Per Share Data (Rs) EPS CEPS BVPS DPS Valuations (x) PER P/CEPS P/BV EV / Sales EV / EBITDA Dividend Yield (%) Gearing Ratio (x) Net Debt/ Equity Net Debt/EBIDTA Working Cap Cycle (days) -0.8 -1.2 -33.5 -0.9 -1.5 -36.0 -1.0 -1.7 -31.8 -0.9 -1.9 -27.4 15.6 14.9 8.9 2.5 12.0 2.7 13.7 13.2 6.8 2.0 9.6 3.1 12.6 12.1 5.4 1.7 8.2 3.6 11.3 10.8 4.4 1.5 7.1 4.0 20.0 16.9 76.4 19.8 16.1 71.5 20.1 15.9 65.5 48.0 -653.1 119.1 123.9 276.5 53.6 20.0 16.0 60.1 43.3 -867.6 133.5 138.7 340.2 60.1 FY11A FY12A FY13E FY14E

71.2 56.2 - -1,029.5 12,158. 126.1 100.6 169.7 40.0 101.6 114.0 219.7 47.2

Emkay Research

May 11, 2012

Bajaj Auto

Company Update

Recommendation History: Bajaj Auto Limited BJAUT IN

Date 19/03/2012 20/01/2012 23/11/2011 24/10/2011 Reports Automobile Sector Update - Red flags increase Bajaj Auto Q3FY12 Result Update Bajaj Auto Company Update Bajaj Auto Q2FY12 Result Con Call Update Reco Accumulate Buy Buy Buy CMP 1,721 1,558 1,600 1,693 Target 1,920 1,920 2,200 2,210

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Date 10/05/2012 02/05/2012 30/04/2012 30/04/2012 Reports Apollo Tyres Q4FY12 Result Update Hero MotoCorp Q4FY12 Result Update CEBBCO_Initiating Coverage Maruti Suzuki Q4FY12 Result Update Reco Accumulate Reduce Buy Reduce CMP 82 2,245 69 1,397 Target 95 2,245 90 1,270

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May 11, 2012

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